A question I often get from clients with a tax debt is how long does the IRS have to collect the taxes I owe?
There is a statute of limitations on collection of taxes, and it is generally 10 years. Once that time expires, you are free from the remaining unpaid tax debt and the IRS cannot collect from you unless they go to court and create a tax judgement which is rare.
When I say generally they have 10 years to collect, there are a few issues on when the time clock starts, and what can cause the clock to temporally stop. The 10-year time window begins when the tax debt is calculated and billed by the IRS. This would normally be when you file a tax return, or the tax audit is finished. For example, if you do not file a tax return for the 2010 tax year, you would not be free and clear in 2020, but rather 10 years from the date the tax bill for 2010 is generated after you file the tax return, or the IRS files a return for you. With a tax audit, unless it is an agreed upon case, the IRS will propose an adjustment and then you have a right to appeal or petition tax court. Once all the legal process is complete, then the tax debt becomes official and the 10 year collection statute starts.
There are a number of ways the 10 year collection statute time period can be delayed. For instance, if you speak to the IRS and tell them you will start paying the tax debt through a payment plan, they will put your plan in pending payment plan status and that will delay the collection period from expiring. The other typical ways to delay the statute is to file an Offer in Compromise, requesting Innocent Spouse Relief, and certain tax appeals. As an example, say there is an appeal, and it takes 5 months to hear, the actual collection statute will then be extended to a total of 10 years and 5 months.
Many times, when a significant tax debt is owed, the IRS will file a tax lien to protect their interest. The tax lien goes against your real and personal property. The tax lien actually occurs when the tax debt is unpaid, and does not require the IRS to file any papers. In most cases, the tax lien will expire once the collection statute ends.
It may hard to believe, but once the collection statute expires, the IRS will adjust your account to zero by writing off the taxes, interest and penalty that is no longer owed. As a side note, the New York State Tax Department has a 20 year collection statute, so typically its not best to wait for the collection period to expire and to file an offer in compromise to reach a settlement.
It is very important to determine the time period the IRS can collect from you. Every case is different but typically if the taxes will expire within the next year I would consider that an important factor in not filing an offer in compromise to settle the taxes, for instance. If the tax debt has more than one year left on it, it would be best to deal with the issue and reach a settlement.